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2015 (5) TMI 726 - ITAT DELHI

2015 (5) TMI 726 - ITAT DELHI - TMI - Revenue earned from supply of software taxed as “Royalty” - DTAA between India and USA - Held that:- Respectfully following the decision of Ericsson A.B. (2011 (12) TMI 91 - Delhi High Court) and Infrasoft Ltd. (supra), we hold that the consideration received by the Assessee for supply of product along with license of software to End user is not royalty under Article 12 of the Tax Treaty. Even where the software is separately licensed without supply of hardw .....

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royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/ PE in India

Revenue earned from rendering of implementation services and maintenance services to customers in India as “Royalty/ FTS/ FIS - Held that:-In the present case, the undisputed fact is that the implementation service is inextricably and essentially linked to the supply .....

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ogy. Under these circumstances, we uphold the arguments of the learned Counsel of the assessee and allow the ground.

Whether ACC constitutes the fixed place, Installation and Dependent Agent PE in India of Aspect US under the Tax Treaty? - Held that:- It is submitted that the assessee has not submitted information on sale of equipment and licensing of software that are done directly by Aspect India to customers and those done through channel partners. It is contended that the assessee .....

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submitted. It is argued that copy of ‘I Approve’ system has not been submitted by the assessee for factual verification. Considering these facts, we are of the view that both the revenue and the assessee have not been able to demonstrate the existence or otherwise of the ‘dependent agent PE’. In the absence of proper information in this regard, we are unable to decide whether the assessee has a ‘dependent agent PE’ in India. We accordingly, set aside the issue of ‘dependent agent PE’ and restore .....

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cts US rights in the IPs/ services for the purposes of such business in India; or that they have used rights in the IPs/ Services for the purpose of making or earning income from a source in India. In the present case, the Revenue taxed the said income on the sole reason that these services are provided by Indian subsidiary of the asseseee and the asssessee is earning huge income from these customers. The AO has not brought anything on record to show that the customers located in Sri Lanka/ Midd .....

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g the income to the assessee’s PE in India - Held that:- Where a PE is held to exist, subject to the application of the force of attraction rule, only profits in relation to the assets and activities of the PE may be attributed to it and that an arm’s length payment to a subsidiary PE as per FAR analysis would be sufficient for such attribution.In view of the above, we agree with the learned counsel of the assessee that where an associated enterprise (that also constitutes a PE) is remunerated o .....

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HIGH COURT) wherein the validity of the instruction no.3 dt.25-5-2003 issued by the CBDT u/s 119 of the Income Tax Act was upheld and the reference to TPO for determination of ALP was considered mandatory.

Claim for deduction of remuneration paid to the alleged P.E. from the profit attributed to the P.E - Held that:- As we have directed the AO to refer the matter to the TPO for determining the ALP and thus decide on attribution of profits, we are of the view that this issue should al .....

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pect India was picked up for scrutiny by the Transfer Pricing Officer (‘TPO’) for AY 2004-05, 2005-06 and AY 2008-09 and the TPO had accepted the value of international transaction declared by the assessee. In support of her submissions, she relied on the decision of the Hon’ble Supreme Court in the case of Morgan Stanley and Co. Inc (2007 (7) TMI 201 - SUPREME Court).Similar issues have been dealt with by us earlier in this order while dealing with attribution of profits to the PE. As the crite .....

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riate rate, the net tax payable by the assessee would have been Nil.The interest obligation has arisen on account of the AO holding ACC as PE of asseseee in India which resulted in higher assessed income. Further, the Revenue has not brought anything on record to prove that the assessee has led the Indian payers to believe that tax was deductible at lower rates. Under these circumstances, we allow this ground in favor of the assessee. - ITA no.1124, 1125/Del/2014, ITA no. 82/Del/2011, ITA no.221 .....

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referred to as AO ) u/s 143(3) read with section 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) for Assessment Years (hereinafter referred to as the AY ) 2003-04, 2004-05, 2007-08, 2008-09, 2009-10 and 2010-11 respectively. As the issues arising in all these appeals are common, for the sake of convenience they are heard together and disposed of by way of a common order. Both parties have agreed that the appeal for the A.Y. 2007-08 in ITA 221/Del/2013 be taken as the l .....

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from supply of software to customers in India as Royalty under section 9(1)(vi) of the Act and under Article 12 of the DTAA between India and USA ( Tax Treaty ) (b) Ground 3 and 4 The learned DRP and the AO erred in holding that the revenue earned from rendering of implementation services and maintenance services to customers in India as Royalty / FTS under Section 9(1)(vi)/(vii) of the Act and under Article 12 of the Tax Treaty. (c) Ground 5.1, 5.2 and 5.3 The learned DRP and the AO erred in ho .....

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Without prejudice to assessee s contention on non-taxability of revenue mentioned in Ground 2 to 6, the AO has erred in taxing the revenue from supply of software earned and rendering of maintenance and professional services to customers located in India Sri Lanka and Middle East as Royalty / FTS on gross basis @15% and also proceeded to attribute the income to the alleged PE thereby, resulting in double taxation of income. (f) Ground 9 Without prejudice to assessee s contention on non-taxabili .....

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allowing deduction of the remuneration paid to Aspect India by the Assessee, despite directions to this effect in Article 12(7)(b) of the Tax Treaty. (h) Ground 11,11.1.11.2 and 11.3 The AO has earned in holding that the Transfer Pricing provisions are applicable to the Appellant. Further, that the AO has wrongly rejected the Transfer pricing analysis of Aspect India and initiated penalty proceedings for not submitting the TP report and not maintaining TP documents. (i) Ground 12, 12.1 and 13 C .....

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mpanies, to better manage customer interactions via voice, email, web and fax. The assessee derives its revenue primarily from supply of contact solutions , software license and provision of services including, installation, maintenance and professional services. The assessee has also provided installation/ implementation and maintenance of the supplied hardware and software. 2. Aspect US had two subsidiaries in India - Aspect Contact Center Software India Private Limited (hereinafter referred t .....

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Sale of hardware: USD 35, 24,795 • Implementation Services : USD 4,91,174 • Maintenance Services: USD 28,79,639 • Professional Services: USD 2,07,083 4. Revenue earned from professional services, was offered to tax on gross basis in the return of income filed. With respect to other sources of income, the assessee, in the notes to the return of income, disclosed that Aspect also provides implementation services, maintenance services, warranty services, education services and techn .....

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nt Establishment in India in the form of Fixed Place, Installation as well as Dependent agent under Article 5 of the Tax Treaty. ACC, the Indian Subsidiary of assessee, was held to be PE of the assessee in India. He held that the revenue from supply of hardware was taxable as per Article 7 read with Article 5 of the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as 'the Tax Treaty ). The AO attributed to PE in India 15% of the revenues earned by Aspect US .....

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efore the DRP-I. The DRP-I, New Delhi vide its order dt. 24.9.2010 u/s 144C upheld the draft order of the AO. In this brief order the DRP rejected the contentions of the assessee and upheld the draft order of the AO. Aggrieved, the assessee is before the Tribunal. The Revenue has also filed Cross Objections with considerable delay. These Cross Objections were later not pressed by the Revenue, after arguing the same for more than two days both on the issue of condonation of delay and also on meri .....

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of software taxed as Royalty under the Act and the Tax Treaty. The Assessee sells contact solutions to the customers in India which is combination of software and compatible hardware that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The software and hardware both are integral parts of the solutions which the assessee sells to the customers and channel partners in India. While the hardware is sold, the software is licensed. With respect .....

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a Inc (95 ITD) on the subject. The assessee contended that the payment for software is for a copyrighted article and not for the copyright right and hence it is not taxable under Article 12 of the Tax Treaty. 8. The submissions made by the assessee were not found acceptable by the AO. The AO considered the definition of royalty under section 9(1)(vi) of the Income-tax Act, 1961 as well as in Article 12(3) of the Tax Treaty and came to the conclusion that the amount received by the assessee from .....

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ialized software having special purpose, usage, to manage and automate the billing process. • The software is tailor made/customized to suit customer needs. • The present software embodies process which is required to control or manage billing activities. Hence, it makes available, the process to its customers; (c) The software for which the licenses have been granted, equips the user/enable the user to carry out high level technical task with precision and that these software are not .....

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the Assessee sells contact solutions and enterprise workforce optimization solutions (herein after referred to as product or contact solutions ), to the call center companies in India and other countries. The contact solution is a combination of both hardware and software components that enables the customer of Aspect US to answer customer request, log in complaints and route communications. The customer buys a complete solution which is manufactured outside India. The software and hardware are .....

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s (P) Ltd (page 83 to 116 of PB 1) forming part of paper book-I, to demonstrate that what is sold to the customer, is product comprising of hardware and software embedded in it. It was also submitted that the hardware and software sales are made outside India by Aspect US and the title and risk of goods is passed to the end customers outside India. Therefore, in view of the decision of the Hon ble Jurisdictional High Court in the case of DIT vs. Ericsson A.B. ( Supra) 470) and the Hon ble Delhi .....

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d only a, non- exclusive, non -transferable right to use the software (i.e. licensed product) solely and exclusively for internal use. The assessee retains all the intellectual property rights in the software and merely provides a copy of the computer programme to the customer, with a limited right to use the licensed product (i.e. the computer programme in machine readable, object code form) for non productive archival and backup purposes or to replace a worn or defective copy. 12. She submitte .....

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oit the software (example reproduce, duplicate etc). The payment for such a right is classified as royalty. 13. She further submitted that copyright actually vests in a person only when he has an exclusive right to do all or any of the acts specified under the Indian copyright Act 1957. Mere making copies of a computer program for the limited purposes described in section 52(1)(aa) of the Indian Copyright Act does not infringe the copyright in such program and therefore does not involve the use .....

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aptation of the computer programme from a personally legally obtained copy for non-commercial personal use does not amount to infringement of copyright. It was further submitted that right to use a copyright in the software is distinct from right to use the programme embedded in the software. She contended that payments made for acquisition of rights in relation to the copyright which are limited to rights which are necessary to enable the user to operate the program, classify as Business profit .....

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mposed on the use of the software (as stated in End User Agreement), such as reverse engineering , disassembling, decompiling, or decoding the software or any portion of them, or using any portion outside the scope of the license granted thereunder. Hence it was submitted that the assessee has not transferred the copy right, but only a copyrighted article. 15. The learned Counsel further submitted that the term license is not determinative of nature of payment. The customers, in the instant case .....

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r the definition of royalty either under the Act or under the Tax Treaty. Our attention was drawn to clause 3, 8 and clause 10 of the agreement between Aspect US and Infovision Information Services (P) Ltd to demonstrate that that there is no transfer of copyright right but only a license to use a copy righted article. Further, reliance was placed on the decision of the Hon ble jurisdictional High Court in the case of DIT vs. Infrasoft Ltd (ITA No 1034/ 2009) where in the Hon ble Court has held .....

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lighting the facts of Ericsson A.B. and Infrasoft decisions, relevant terms of the agreement in both the cases and similarity of the same with the facts of Aspect US. 17. On the Revenue s contention that revenue received would qualify as process royalty or equipment royalty , the learned Counsel submitted that in the instant case, the customers are merely provided with the object code and not the source code to the software (where the information or knowledge resides). The object code is suffici .....

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rd equipment can apply only to a tangible product. In the instant case, the customers are given a computer software programme and there is no equipment of the assessee which is used by the Customer. 18. Further, she argued that despite the amendments made by the Finance Act 2012 to the definition of royalty , the revenues arising from the sale of software are not taxable under the provisions of the Tax Treaty as the said amendment shall not have any impact on the protection available under the T .....

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Services wherein it has been held that computer software is goods . Accordingly, its sale cannot result in generation of royalty and can only be treated as sale of goods. 20. In addition to the above case laws, a number of other decisions have been cited by the Learned Counsel for the assessee. We have gone through all the decisions and we would be dealing with them as and when necessary. 21. On the other hand, the learned counsel for the Revenue submitted that the taxation of the revenue from .....

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r has right to sublicense the products which include software items (clause 3 (C ) page 97 of PB -I). 22. He further submitted that the arguments of the learned Counsel of the assessee are based on the following assertions: (a) That the software is supplied outside India and sale is made on FOB basis. This statement that the property in goods is transferred outside India is factually wrong, and that the claim is made so as to fit within the definition the contours of the decision of the Hon ble .....

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e software is neither transferred in India nor outside India. The user of the software gets only partial rights in the software to use it and the channel partner got right to sublicense the software. He further submitted that the Assessee has not provided a copy of the agreement between the Channel partner and the end user of the software. However, based on available documents it is explicitly clear that the end user gets rights to use the software and they must return or destroy the software co .....

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ght holder. Referring to section 4 of the Sale of Goods Act, he argued that the section requires that in case of a sale, the property in goods should transfer to the buyer for a price. In case of licensing of software full transfer of rights do not take place and it cannot be treated as an outright sale of goods. (c) Further, the claim that software has been supplied directly is also wrong in the case when the software is licensed to channel partner who had the right to sub license to the custom .....

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ch a provision, the documents are considered delivered at the residence of the purchaser. Title in the software always remains with Aspect Software Inc. (e) The assesee s contention that software and hardware are co-joint and software and hardware is always sold together is factually incorrect from the submissions of the assessee on page 186 of PB- II which states that some customers purchased license for the software from the assessee without purchase of the equipment. This is evident from the .....

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icsson case to the facts of the present case. (f) On the argument of the assessee that billing is done from the USA, payments are made outside India and shipment is made to India, the learned CIT-DR submitted that it cannot be verified whether billing is from the USA as the same can be printed in the office of Aspect India, Further, these are not signed. Otherwise also, these facts do not decide the taxability of the transaction. (g) Under section 14 of the Copyright Act, copyright means the exc .....

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ly such rights to any other person. There is no requirement under the Copyright law that the owner of rights should grant exclusive right to the other to do all or any of the acts to which the author/ owner is having exclusive rights. 22.1. The Ld. D.R. pointed out that the Government of India Publication Handbook on Copyright Law states that the expression reproduce as used in Section 14(a)(i) of the Copyright Act, mean the right to make one or more copies . Therefore, he contended that there i .....

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uments, he heavily relied upon the decision of Hon'ble Karnataka High Court in the case of CIT (International Taxation) v. Samsung Electronics Co. Ltd. ( 203 Taxmann 477 , Kar HC) and the decision of ITAT Delhi Bench in the case of Gracemac Corpn. v. Asstt. DIT (42 SOT 550). 23. He submitted that in view of the clarificatory amendment to section 9(1)(vi)( c) of the Act made by the Finance Act 2012, the income from licensing of software is taxable as royalty under the provisions of section 9( .....

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of a license) in respect of computer or computer based equipment under any scheme approved under the policy on computer software export, software development and training 1986 of the Government of India. This proviso explicitly carves out the taxation of income from the specific type of software supply only. Thus, income from supply of software through any other arrangement is taxable as royalty. Otherwise the second proviso would become redundant. 25. The Ld.CIT, D.R. argued that Section 115A o .....

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yalty under the Act. 26. The Learned CIT DR submitted that the taxability of revenue from all sources is required to be decided based on the provisions of the Income Tax Act only, since the assessee is not eligible to claim the benefits of tax treaty in view of specific provisions in Article 24 Limitation of Benefits of the Indian DTAA with the USA. Article 24 of the Tax Treaty denies the benefits of the tax treaty to tax resident of the USA if such tax payer does not satisfy the requirements of .....

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is interpreted on the basis of the definition of the terms available in the treaty. The definition of terms is normally given in the respective Articles. Article 3 of the Tax treaty deals with definition of general terms used in the Tax Treaty. Paragraph 2 of Article 3 provides rules for interpretation of undefined terms. Referring to Article 3(2) of the Tax Treaty, he submitted that any term not defined in the Convention shall unless the context otherwise requires, have the meaning which it has .....

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he concept of copyrighted article borrowed from the proposed law of the US or the commentary to the OECD Model Tax Convention in the ITAT decision (confirmed by the High Court) in the cases of Ericsson/ Nokia etc. is clearly not authorized under the Tax Treaty. Therefore, these decisions are distinguished and not applicable in the present case. The term copyrighted article is not defined or recognized in the Act. The expression use of, or the right to use any copyright is not defined in the tax .....

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r he submitted that the revenue received on account of licensing of software would qualify as process royalty and equipment royalty taxable under the Act and the Tax Treaty. 31. In rejoinder, the learned Counsel for the assessee submitted as under: (a) Software is not embedded in the hardware: The software and hardware are integral parts of the solutions which the Appellant sells to its customers and channel partners in India. The software cannot function without the hardware. They are shipped s .....

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ve been sold software exclusively, implying majority of customers having purchased both hardware and software. Even this minority pertains to certain upgrades etc. which have been provided at cost. A selective sampling by the learned DR cannot be the basis to argue that software is being sold independently. Even otherwise, the question of whether software is embedded or not, becomes academic as in either situation the jurisdictional High Court in Nokia, Ericsson and Infrasoft decisions (SUPRA) h .....

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oftware always remains with the Aspect Software Inc . If that be the case, how can there be any transfer of copyright, which is pre-requisite for sale to be taxed as royalty under the treaty? (f) Amendments to the definition of the royalty under the Act to be read into the Tax Treaty : The learned DR has sought to distinguish the Hon ble Delhi High Court ruling in the case of Ericsson and Nokia on the ground that definition of the term use of , or right to use any copyright is not defined in the .....

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n of such term under the Act would have no bearing on the interpretation of such term in the context of the Convention. (g) The Infrasoft ruling has very clearly considered the position post the retrospective amendment and still held software to be not taxable as royalty under the treaty following the precedent laid down in case of Ericsson ruling. (h) Regarding the Learned DR s reliance on the Gracemac ruling, it is respectfully submitted that the ruling was pronounced on shrink wrapped softwar .....

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d the material on record, we hold as follows. 33. For the subject AY under appeal, the assessee has earned revenue from licensing of software and supply of contact solutions to the customers in India which is a combination of software and the compatible hardware that enables the customers to better manage customer interactions via voice, email, web and fax. All the contact solutions are manufactured outside India in USA and the supplies are made from outside India to various customers on Ex work .....

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software. Sample copies of the agreement with the end user and the channel partners along with invoices have been filed before us. 35. Considering the business model of the assessee with respect to supply/ licensing of software, we have considered the following sample agreements relied by both the parties during the course of the hearing: • Agreement between Aspect US and Infovision Information Services (P) Ltd ( end user customer ) -page 83 to 95 of PB-I. • Channel sales agreement be .....

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sferable right to use the software and Ancillary programs ( License ) subject to the provisions specified below. Customer may (i) Use up to the number of licenses specified on the quotation solely for its own internal business use (which shall not include use as an application service provider or any other renting, leasing, sublicensing or other utilization of the software or Ancillary programs to or by anyone other than by customer or its agents or Affiliates), only on the hardware authorized i .....

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ineer the Products, except as and be the extent expressly authorized by applicable law. The interface information necessary to achieve interoperability of the Products will be provided by Aspect on request and upon Customer s payment of Aspect s reasonable costs and expenses for procuring and supplying such information. Customer shall not at any time remove, modify, obscure or otherwise alter in full or in part any copyright or other proprietary notice(s) of Aspect s or a third party as the same .....

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icable) also includes all fixes and new releases provided by Aspect (or its representatives) to customer, as well as copies thereof. Ancillary Programs- Ancillary Programs means a third party computer program(s) in object code form which is provided by Aspect for use with the software and Equipment. Clause 8- Termination clause (Page 90 of PB-I) Aspect may at its discretion terminate the license by written notice upon happening of following events; (i) if the customer breaches material license p .....

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nder, including, without limitation, all intellectual property and other proprietary rights associated therewith ( IP Materials ) shall vest in and be held by Aspect and/or its third party licensors. Such rights shall include, without limitation, as rights in patents, copyrights, trade secrets, trademarks, inventions and mask works. Customer shall, at Aspect s request and expense, promptly take all such action and execute such further documents and instruments as are necessary to vest full title .....

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l Sales Agreement dt. 12th October, 2005 between Aspect Software Inc., USA and CS Infocomm Pvt.Ltd., India DEFINITIONS (k) End User means Partner s customers who are end-users of Product within the Territory. (l) End User Agreement means that certain written agreement entered into by and between Partner and End-User, pursuant to which End User shall procure Product and Services directly from Partner. (m) Equipment means Concerto s proprietary equipment and third party equipment for which partner .....

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ain End-User specific data or information). (r) Marks means trademarks, service marks, logos or other words or symbols identifying the Products or Concerto s business including circuit layouts, invention and mask works. (y) Product(s) means the Equipment, Software, Ancillary programs and Documentation. Upon notice to Partner, Concerto may add new products to its offerings or delete existing products subject to Partner s binding Product orders accepted by Concerto prior to the date of such notice .....

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Partner has received appropriate Documentation, fixes, modifications, updates, upgrades, new versions and/or copies of the Software provided to Partner pursuant to Concerto s obligations under this Agreement, including, without limitation, Service deliverables provided hereunder. (c) Software Sub-Licensing :- (i) Partner shall promote, solicit and accept orders for the Software and Ancillary Programs subject to the provisions of this Agreement, specifically including without limitation, the pro .....

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se of the Software and Ancillary Programme, shall be no less restrictive than the Minimum License Terms. Concerto may, in its sole discretion, modify or replace the Minimum License Terms at any time, in whole or in part, upon notice to Partner. Partner shall not be required to retroactively apply any such modification to the Minimum License Terms. Partner shall also apply all applicable sub-licensing procedures as same appear in the Guide as of the effective date of the specific End-User Agreeme .....

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grams, in whole or in part. (iv) Partner recognizes that the Ancillary Programs are licensed to Concerto by Third Party Licensor(s) and that the functionality of the Software relies in part on such Ancillary Programs. Partner further recognizes that Third Party Licensors may, from time to time, impose the restrictions on the sale, license or use of such Ancillary Programs within the Territory. Concerto shall notify Partner of any such third party actions, but shall have no liability whatsoever t .....

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hat each such Third-Party Licensor fully accepts such rights as a third party beneficiary of this Agreement and that such rights were irrevocable. (v) Partner will effectively enforce against all its End-Users the Minimum License Terms, specifically including, without limitation, those provisions that affect proprietary or confidentiality rights of Concerto or its Third Party Licensors. If Partner learns that any End-User has breached any such provision, Partner will immediately notify Concerto .....

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be an End-User subject to the Minimum License Terms, in addition to the other applicable terms of this Agreement. In the event Partner obtains or uses any item of Software and/or Ancillary Programs for demonstration purposes such Software and Ancillary Programs shall be provided pursuant to, shall be subject to, and Partner hereby agrees to be bound by the Minimum License Terms except to the extent that they may conflict with the specific provisions contained in the main body of this Agreement. .....

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in the Territory will not affect the place or time of Delivery. Product to be delivered hereunder will be package appropriately for shipment in accordance with standard commercial practices. (iii) Each Delivery shall be made F.O.B. origin, Freight prepaid and add , with freight charges billed to Partner by Concerto. All shipping, insurance, and other related obligations shall be assumed by Partner at the time of Delivery. Partner will pay or reimburse. Concerto for any insurance, brokerage, hand .....

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ed by Concerto hereunder. Product shall be deemed to have been accepted by Partner upon Delivery. (v) Title to the Equipment and all risk of loss to the Products shall pass to Partner upon delivery to the common carrier. Partner, at its expense, shall insure all Equipment against risk of loss and damage until delivered to the destination stated in the order. Partner acknowledges that title to the Software and Ancillary Programs shall at all times remain vested in Concerto or its licensors and wi .....

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rier on behalf of Partner, in no event shall Concerto be liable for shipment by common carrier nor shall such common carrier be construed to be an agent of Concerto. 36. From the above clauses, it is evident that what is sold to the end customer is a product comprising of both hardware and software. The software is not separately licensed. Further, Aspect US retains all the intellectual property rights in the software and the end user is merely provided with limited right to use the licensed pro .....

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f hardware and license of embedded software to end customers is squarely covered in the favour of the assessee by the decision of the Hon'ble Delhi High Court in the case of DIT v. Ericsson A.B. (Supra). 38. In the case of Ericsson, the Hon'ble Delhi High Court was dealing with a question as to whether the Tribunal was justified in holding that the consideration for supply of software was not a payment by way of royalty, and hence was not assessable both under Sec.9(1)(vi) of the Act and .....

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ll as under the treaty between India and Sweden. He held that it was business income and Assessee had a PE in India. The CIT(A) held that the receipts in respect of license to use software which is part of the hardware alone could be taxed in India as royalty. The Assessee argued before the Tribunal that the payment made by the assessee for the use of software in the equipment does not amount to royalty. The Tribunal in the aforesaid context examined the issue as to whether the payment is for a .....

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n copyright under the Copyright Act, 1957 held that what was sold by the non- resident was a copyrighted article and payment to the non -resident was not for copyright. On further appeal by the Revenue, the Hon'ble Delhi High Court held that income did not accrue to the non-resident by virtue of a business connection in India and therefore the question of the Nonresident having a permanent establishment in India did not arise for consideration at all. On the issue whether the payment to the .....

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All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India" 51. The submission of Mr. Prasaran, learned ASG was that software part of the equipment supply would attract royalty as copy right of the said software programme still vests with the assessee. Therefore, payments made .....

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find that the Tribunal has held that there was no payment towards any royalty and this conclusion is based on the following reasoning:- (i) Payment made by the cellular operator cannot be characterized as royalty either under the Income Tax Act or under the DTAA. (ii) The operator has not been given any of the seven rights under S.14 (a) (i) to (vii) of the Copyright Act, 1957 and, therefore what is transferred is not a copyright but actually a copyrighted article (iii) The cellular operator can .....

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e to show that the assessee was a party to the fixation of value for the customs duty purposes (vi) The software provided under the contract is goods and therefore no royalty can be said to be paid for it. 53. Mr. Prasaran, countered the aforesaid reasoning arguing that Clause 20 of the Supply Contract uses the term "licence" and the same term is used in the context of software throughout the three Agreements, indicating that it is not an outright sale of goods, or a full transfer of r .....

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y itself be used to hold that no right exists in the first place, since the scope of the right has to be understood only from the provisions of Section 14 of the Copyright Act, 1957. He also argued that the ITAT has misinterpreted the provisions of the DTAA, specifically Article 13, para 3 of the DTAA (Article 12, para 3 of the Model Convention) which defines royalties to mean "payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, a .....

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are is to be treated as royalty. He further argued that reference to OECD Commentary was not apposite as it could not be used to interpret the scope of the relevant provisions of DTAA. 54. It is difficult to accept the aforesaid submissions in the facts of the present case. We have already held above that the assessee did not have any business connection in India. We have also held that the supply of equipment in question was in the nature of supply of goods. Therefore, this issue is to be exami .....

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was a GSM which consisted both of the hardware as well as the software, therefore, the Tribunal is right in holding that it was not permissible for the Revenue to assess the same under two different articles. The software that was loaded on the hardware did not have any independent existence. The software supply is an integral part of the GSM mobile telephone system and is used by the cellular operator for providing the cellular services to its customers. There could not be any independent use .....

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Following discussion in this behalf is required to be noted:- "In our view, the term "goods" as used in Article 366(12) of the Constitution of India and as defined under the said Act are very wide and include all types of movable properties, whether those properties be tangible or intangible. We are in complete agreement with the observations made by this Court in Associated Cement Companies Ltd. (supra). A software programme may consist of various commands which enable the comput .....

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a sale of music on a cassette/CD or a sale of a film on a video cassette/CD. In all such cases, the intellectual property has been incorporated on a media for purposes of transfer. Sale is not just of the media which by itself has very little value. The software and the media cannot be split up. What the buyer purchases and pays for is not the disc or the CD. As in the case of paintings or books or music or films the buyer is purchasing the intellectual property and not the media i.e. the paper .....

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t Systems Ltd. v. Unisys Corpn, 925 F. 2d 670 (3rd Cir. 1991), relied on by Mr. Sorabjee, the court was concerned with interpretation of uniform civil code which "applied to transactions in goods". The goods therein were defined as "all things (including specially manufactured goods) which are moveable at the time of the identification for sale". It was held : "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distrib .....

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t once in the form of a floppy disc or other medium, the program is tangible, moveable and available in the marketplace. The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the Code definition includes "specially manufactured goods." 56. A fortiorari when the assessee supplies the software which is incorporated on a CD, it has supplied tangible property and the payment made by the cellular operator for acquiring suc .....

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II of the contract and also the separate agreement, as referred to above, would clearly show that it was one and the same transaction. One cannot be read in isolation of the other. The services rendered by the experts and the payments made towards the same was part and parcel of the sale consideration and the same cannot be severed and treated as a business income of the non-resident company for the services rendered by them in erection of the machinery in Midhani unit at Hyderabad. Therefore, .....

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not connected for the fulfillment of the main contract entered into principal to principal. This is not one such case and thus the contention of the Revenue cannot be accepted in the circumstances and nature of the terms of the contract of this case." 58. No doubt, in an annexure to the Supply Contract the lump sum price is bifurcated in two components, viz., the consideration for the supply of the equipment and for the supply of the software. However, it was argued by the learned counsel .....

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e Copyright Act makes it clear that a computer programme is to be regarded as a "literary work". Thus, in order to treat the consideration paid by the cellular operator as royalty, it is to be established that the cellular operator, by making such payment, obtains all or any of the copyright rights of such literary work. In the presence case, this has not been established. It is not even the case of the Revenue that any right contemplated under Section 14 of the Copyright Act, 1957 sto .....

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stur that even assuming the payment made by the cellular operator is regarded as a payment by way of royalty as defined in Explanation 2 below Section 9 (1) (vi), nevertheless, it can never be regarded as royalty within the meaning of the said term in article 13, para 3 of the DTAA. This is so because the definition in the DTAA is narrower than the definition in the Act. Article 13(3) brings within the ambit of the definition of royalty a payment made for the use of or the right to use a copyrig .....

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is expressed by the Hon ble Jurisdictional High Court in the case of Nokia Networks OY (supra). 40. As far as the cases where only the software is separately licensed (i.e. with respect to 8 out of 63 customers to whom the assessee has licensed only the software), the issue is squarely covered by the decision of the Hon'ble Jurisdictional High Court in the case of Infrasoft Ltd. (supra), wherein their Lordships held as under:- "86. The Licensing Agreement shows that the license is non-e .....

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nce authorisation device, which restricts the use of the Software. The software is to be used only for Licensee's own business as defined within the Infrasoft Licence Schedule. Without the consent of the Assessee the software cannot be loaned, rented, sold, sublicensed or transferred to any third party or used by any parent, subsidiary or affiliated entity of Licensee or used for the operation of a service bureau or for data processing. The Licensee is further restricted from making copies, .....

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necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such payment, obtains all or any of the copyright rights of such literary work. Distinction has to be made between the acquisition of a "copyright right" and a copyrighted article". Copyri .....

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ghted" article. This sale consideration is for purchase of goods and is not royalty. 88. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer's hard drive or random access memory or making an archival copy is an essential step in utilizing the program. Therefore, rights in relation to these acts of copying, where they d .....

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not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict u .....

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them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro-tanto. 41. Before us, the learned counsel for the Assessee as well as the learned D.R. re .....

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the view taken by the Karnataka High Court in the case of Samsung Electronics Co Ltd. Hence, the decisions relied by the learned CIT-DR in the case of Samsung Electronics and Gracemac Corporation (supra) does not help the case of the Revenue, as we are under the Jurisdiction of the Hon ble Delhi High Court. 42. In view of the above, respectfully following the decision of Hon'ble Jurisdictional High Court in the case of Ericsson A.B. (supra) and Infrasoft Ltd. (supra), we hold that the consi .....

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f mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article. Hence, the payment for the same is not in the nature of royalty under Article 12 of the Tax Treaty. The receipts would constitute business receipts in the hands of the Assessee and is to be assessed as business income subject to assessee having business connection/ PE in India as per adjudication on Ground No 5. Ground No 3 and 4 43. The above grounds deal with reve .....

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provided as under: • Where the supply of the product is directly by Aspect US, the services are provided remotely by Aspect US to the end customer • Where the supply of the product is made by Aspect US through Channel Partners, the services are provided by Channel Partners • Where the end customer or Channel Partner insist on providing onsite support, ATC, the subsidiary based out of Bangalore provides the support. (ii) Maintenance services - These services are provided for a peri .....

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te support, ATC provides the support. (iii)Professional Services- These services include telephone, e-mail and web support, software support by accessing site configuration to determine revision levels for the authorized software partners, software upgrades etc. It also includes wide range of classroom and computer based courses as well as custom courses tailored to meet unique training, schedule and location requirements that focus on the application and functionality of Aspect products. Revenu .....

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xtricably linked with the grant of software licenses. The AO has taxed the revenues from these services as Fees for Technical Services under Sec. 9(1)(vii) of the Act and as FIS under the Tax Treaty. Similarly for maintenance services, the AO was of the view that they are FTS under the Act and FIS under the Tax Treaty for the reason that there would not have been any maintenance expenses if the soft ware in question is shrink wrapped soft ware. The action of the AO was confirmed by the DRP. 46. .....

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ilable technology, skill or experience, etc to the end users i.e. such service are not geared towards enabling the end user s personnel to undertake similar activities independently in future. 47. On maintenance services, it was argued that these services are provided remotely to the end users and only in rare cases, where end users/ channel partners insist on onsite support, the Indian AEs of the assessee provides the same. The services are not rendered in India and hence not taxable u/s 9(1)(v .....

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the service provider. Further, these services also includes provision of upgrades and new releases which do not fall within the definition of FIS under the Tax Treaty, since there is no development and transfer of these updates. The software is not developed and customized for one person but for all the software users at large. Thus, they are in the nature of software itself and since the payment for software is not taxable in India, the revenue from maintenance services ought not to be taxed in .....

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ITR 467, Kar HC) 49. The learned CIT -DR relied on the orders passed by the AO and submitted that the definition and scope of various support services provided by Aspect India to customers of Aspect Inc is available as given below: • Services (Clause 1 on page 83 of PB-I) • Support services: Implementation (page 86 of PB-I); Maintenance support (page 86 and 87); education services (page 88); professional services (page 88) and Time and Remedies (page 88). 50. The learned Counsel for th .....

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ed to Clause 3(b) and 3(c) on page 97 of the PB-I and submitted that Channel Partners obligations include equipment and service sale. Regarding pricing of the products and related services, the Partner will establish the prices that it charges to the end user within the territory for the products and related services distributed by the Partner. This suggests that 90% of the services are provided by Channel Sales Partner. Implementation and maintenance services are technical services and these se .....

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enance services encompasses providing new release of software, provide tracking tool that enable the customer to track the performance of equipments and software, provide self help environment, support to named and trained personnel. The Ld.D.R. contended that these services make available technical knowledge, experience and skill and Know how. He further submitted that the implementation and maintenance services are not independent of licensing of software. Hence, the payments are in the nature .....

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ccount of services provided by Aspect India or employees of the assessee in India. 52. We have heard both the parties at length and perused the relevant clauses of the agreement which deals with the above services. Services have been defined in the agreement to include installation services, maintenance services, education services, professional services and T&M services, all as hereinafter defined, and any other services provided to Customer by or on behalf of Aspect, together with the rela .....

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he payments would qualify as FIS if the payment is for rendering of any technical or consultancy services, if such services: a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received ; or b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 55. The term make available is not defined un .....

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eaning of paragraph 4(b). Similarly the use of a product which embodies technology shall not per se be considered to make the technology available". 56. In the present case, the undisputed fact is that the implementation service is inextricably and essentially linked to the supply of software. In view of our decision in Ground No 2 that the supply of software is not taxable as royalty under the Tax Treaty, the provision contained in clause (a) to Article 12 (4) would not apply to both Imple .....

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provisions of service PE applies and the entire transaction has to be considered as business income, we would deal the same in the ground relating to determination of PE. Ground No 5 58. This ground deals with holding whether ACC constitutes the fixed place, Installation and Dependent Agent PE in India of Aspect US under the Tax Treaty. 59. The AO has held that the assessee has a fixed place PE, dependent agent PE and installation PE under the provisions of DTAA for the following reasons: (a) T .....

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t page 46 to 51 of his order, to prove his point that the functions have not been properly identified by the assessee in the transfer pricing analysis. He concluded that the assessee has identified complete functions. Hence for the reasons given in the order, the transfer pricing analysis of Aspect, India is held to be defective. Hence he rejected the same. He held that ACC is a projection in India and Aspect, USA and ACC provides the important peoples function to the assessee. (d) The subsidiar .....

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installation and implementation office in India for the assessee. The DRP rejected the objections of the assessee in this regard and confirmed the finding of the AO. 61. The learned Counsel for assessee presented the following facts: (a) Aspect US does not have any fixed place at its disposal in India. The premises of ACC is solely for the personnel of ACC and is not available to Aspect US at its disposal. The personnel of Aspect US have visited the office of ACC to occasionally use certain faci .....

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carried on any business operations in India. All the contracts for supply of soft ware, hard ware and services are concluded outside India. The terms of contract are negotiated and concluded by Aspect US through an i- approach system loaded on the server located outside India. Further, the property in the products supplied by the assessee to the Indian customers is passed/ transferred outside India. (d) In terms of service agreement entered into between Aspect US and ACC, ACC has a very limited .....

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degree of factual or operational control over the facility/premises and hence it does not have any place of business in India and that it did not carry out any business operations in India. 63. It was argued that, the assessee concluded all the contracts on supply of software outside India the contracts are initiated and concluded by Aspect, US through i-approve system, loaded on a server located outside India. 64. The property in the goods supplied to the Indian customers passes outside India a .....

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carries out activities of the assessee, these are only auxiliary activities which do not constitute the core business activity of the assessee company. Hence, the case would also be covered under the specific exclusion provided under Article 5(4) of the DTAA. Hence it was argued that the assessee does not have a fixed P/E. Reliance was placed on the following case laws. • Motorola Inc. vs. DCIT (SB) (2005) 95 ITD 269 (Delhi S.B.) • CIT vs. Visakhapatnam Port Trust 144 ITR 146 • CI .....

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guished from installation of tangible property/equipment as envisaged under various commentaries to constitute installation P/E. 68. Under the Treaties, the term installation project is used for projects which requires substantial effort in terms of time, money, technical enterprise planning subsidiary and hence the nature of services of the assessee cannot be called installation services as contemplated in the Treaties. The implementation services rendered by the assessee do not involve time/ef .....

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assessee to the customers in India. (ii) The relationship between the assessee and its subsidiary ACC is that of an independent contractor, which is specifically provided in the service agreement between them. 70. The assessee and its subsidiary shall not control the day-to-day activities of the other party and allow either of the parties to create any obligation on behalf of each other. ACC is not legally or economically dependent on the assessee and is independent both economically and legall .....

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described as follows: to demonstrate the utility of the projects of the assessee to the customers as per their requirements and to pass on pricing function and contract terms as determined by Aspect, US. The process was explained as follows: • The end customer places the request with the channel partner, who after understanding the needs of the customers, submits the request to the ACC. • ACC inputs the requests specifications to Aspect US via I Approve system which is controlled/manag .....

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product is directly made by Aspect US to the customers; • Aspect US raises the invoice directly on customers/Channel Partners; • Payment is remitted by the customer to Aspect US. Hence it is submitted that the assessee does not have a P/E in India in terms of the Act. 72. The Ld.CIT, D.R. on the other hand listed out the revenues received by the assessee from Indian customers in this year as follows: a) Sale of software $ 6585468 (48.10%) b) Sale of hardware $ 3524795 (25.74%) c) Imple .....

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or a period of one year as a part of the licensing of software and sale of hardware and this can be renewed each year thereafter. The services listed out by the Ld.DR are: a) Resolving bugs b) New release of software c) On line Pass Word protection, reporting, tracking tools and self help environment. d) On site support as per applicable policies and procedures. e) Telephone support to trained personnel. 75. The Ld.D.R. also pointed out that, for availing services it is necessary that the custom .....

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d by Aspect India, the assessee is invoicing the customers and receiving all the payments. 78. The sum and substance of Ld.DR s submission is that the sale of equipment and performance of services and licensing of software are done to the customers by the channel partners or Aspect India only, but the revenues are accounted for by the assessee. He referred to the service agreement between ACC and the assessee dt. 9.2.2004, for providing sales support services and laid emphasis on Article 1 on pa .....

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s in excess of the limitations placed on it by agreement dt. 9.2.2004. 80. He referred to the last service agreement between the Aspect Inc. and Aspect India effective from 1st August,2004 and submitted that under this agreement the contractor will perform research development, testing services, as it is requested by Concerto Software Inc. i.e. the assessee company Aspect Software Inc. He also referred to the amended agreement dt. 20th December,2006 and alleged that the assessee has not submitte .....

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of the assessee in India was not forthcoming and hence the AO issued notice u/s 133(6) of the Act. 82. Thereafter the Ld.D.R. submits that Aspect India the Indian Subsidiary or the channel partners identified the customers, under the specifications or requirements and for this purpose, it involves meetings, presentations etc. to suit the customer requirement. He alleged that Aspect India prepares a comprehensive proposal including prices and sends to customer, channel partner who in turn submits .....

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etc. reasons justifying the price, request price, discount etc. He contended that the information is completed by the sales team of Aspect India and it was subsequently assigned to various persons for approval including country Manager of Aspect India. Justification for the price/discount offered by Aspect India while negotiating terms and conditions are mentioned in the I approve . The activities undertaken and decision taken by Aspect India in making sales gets fully documented in I Approve . .....

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than what has been stated in the agreements between the two related entities. Thus he submits that the functions performed are not properly disclosed in the T.P. analysis and that these agreements have not correctly captured the services provided by Aspect India and are to be considered as selfserving documents. 86. He pointed out that the proposals are also prepared to get approvals for non standard payment terms. The sales team of Aspect India also secured orders for customers in Sri Lanka and .....

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ect India and argued that this shows that the prices and discounts initiated by the Indian Subsidiary are final and that the assessee has no direct role. The Ld.D.R. stated as follows: • The claim that the customer is free to purchase any individual product or services, as many customers have purchased only the services during the year without acquiring any hardware or software. Some customers purchased license for the software from the assessee without purchase of the equipment {page 186, .....

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omers and the prices are negotiated by Aspect India. Purchase orders are placed by the customers that are secured by Aspect India. Assessee has not submitted information on sale of equipments and licensing of software that are done directly by Aspect India to customers and those done through channel partners. • Claim that Aspect India acts as a communication channel between the assessee and the customers is factually incorrect, as to act as a communication channel, Aspect India should have .....

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ustomers. Designations of employees are evidence of this position. • Assessee claim that it identifies customers in India and maintains the relationship is false and baseless and totally contrary to the facts brought out on record. It must have demonstrated that Aspect Inc. (and nor aspect India) identifies customers and make sales. What is the set up of the assessee in India other than Aspect India? And what are the expenses in this regard? The assessee as a responsible corporate citizen s .....

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ers, sales manager, and senior sales manager and director sales. • Claim that channel partners do not require any concurrence from the Appellant for sale of the product to the ultimate customer is apparently not correct because the channel partners do forward the purchase order of the end customer to Aspect India and the discounts are decided by the Aspect India. • Claim that Aspect India acts as a communication channel between the assessee and the customers in Sri Lanka and Middle Eas .....

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and Middle East. The assessee could have submitted the travel expenses detail of Aspect India to demonstrate that employees of Aspect India did not visit these countries. • Claim that customer directly contact with the assessee is factually incorrect as no customer has ever directly interacted or corresponded with the assessee. Similarly the assessee has never come in contact with the customer. • It has been claimed that majority of sales are made to channel partners. Information on al .....

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t India to customers. • Claim that assessee does not play any role in performance evaluation of employees of Aspect India could have been substantiated by submission of performance evaluation report of employees, say Shri Shankar Balu to indicate that his incentives/ promotions/salary is not dependent on sales targets achieved by him. • Assessee has claimed (page 191 of PB-2) that it had submitted copy of "IApprove" where the proposals of discounts made by Aspect India have b .....

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Payment of the goods are received outside India d) Property in goods is transferred outside India and e) All the contracts for supply of hardware and software are concluded and signed outside India. 90. The Ld.D.R. relied on the order of the AO and contended that: * the assessee did not prove its claim that the contracts are concluded outside India; *channel partners prepared quotations based on information provided by Aspect India; * even if the server is located outside India, it is not of an .....

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t US visited India for the limited purpose of meeting prospective/existing customers etc. supports the revenue s decision that all sales related activities are carried out by the subsidiary only; * the support provided by the assessee s employees to the subsidiary cannot be considered as a preparatory and ancillary activity. As the core business of sale equipment, licensing of software and provide services; * the designations given to the employees of the subsidiary indicate that it is these emp .....

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India provide office premises/sets the employees of the assessee company; • transfer pricing analysis of the assessee for FY 2002-03 and 2003-04 referred to tangibles owned by it and that the Indian subsidiary has used an ITC system of the assessee for the business in India and this international transaction is not recognized in the report that the assessee s assets are used by the Subsidiary in India free of cost; • In TPO s order the fact of earning commission of hardware sale is no .....

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Agent PE in India. Our finding in respect of each of the forms of PE is as under: Fixed PE: As per Article 5(1) of the India -USA DTAA, the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Article 5(2) deals with various instances resulting in PE. Article 5(3) deals with cases or facts which do not result in PE. One of the exceptions under Article 5(3) is maintenance of a fixed place of business solely for th .....

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main business activity and cannot be regarded as auxiliary nature. As regards the fixed place of business in India, it is contended by the assessee that the business place of Aspect India is not under the control or at the disposal of the assessee and, hence, there is no fixed PE. The revenue, on the other hand, has contended that since the employees of the assessee were in India, the assessee has carried on business in India. After considering the material on records, we are of the view that ne .....

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of PE in India. The assessee also shall submit the details as called for by the assessing officer. Installation PE: The revenue contends that since installation and support services are provided by Aspect India, there exists an installation PE of the assessee in India. As per Article 5(2) of India - USA Treaty, the term Permanent Establishment includes especially the following: (i) Clause (j): An installation or structure used for the exploration or exploitation of natural resources, but, only .....

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use (k) above. As per Article 5(2)(k), a building site or construction, installation or assembly project or supervisory activities in connection therewith is regarded as PE is such project or activities (together with other such sites, projects or activities, if any) continue for a period of more than 120 days in any twelve-month period. Article 5(2)(k) should be read as a whole. The term in connection therewith would apply for the entire preceding words viz., a building site or construction, in .....

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he view that there is no installation PE of the assessee in India. Dependent Agent PE: Article 5(4) of India - USA Treaty deals with the Dependent Agent PE. It reads as under: Notwithstanding the provisions of paragraphs 1 and 2 where a person-other than an agent of an independent status to whom paragraph 5 applies -is acting in a Contracting State on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned S .....

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delivers goods or merchandise on behalf of the enterprise, and some additional activities conducted in the State on behalf of the enterprise have contributed to the sale of the goods or merchandise; or (c) He habitually secures orders in the first-mentioned State, wholly or almost wholly for the enterprise The first and foremost requirement under Article 5(4) is that the said Article will apply to a person other than an agent of an independent status to whom paragraph 5 applies. Paragraph 5 of A .....

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ns between the agent and the enterprise are not made under arm s length conditions, he shall not be considered an agent of independent status within the meaning of this paragraph. Paragraph 5 lays down conditions as to when can an agent; broker is regarded as dependent agent or independent agent. If the agent is devoted wholly or almost wholly on behalf of the enterprise and the transactions between the agent and the enterprise are not made under arm s length conditions, the agent is not conside .....

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pendent agent PE in India. The revenue, on the other hand, has argued that the assessee has not submitted proper facts to substantiate its contention. It is submitted that the assessee has not submitted information on sale of equipment and licensing of software that are done directly by Aspect India to customers and those done through channel partners. It is contended that the assessee has not demonstrated that it identifies customers and make sales. The statement recorded from the Director, sal .....

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ation. Considering these facts, we are of the view that both the revenue and the assessee have not been able to demonstrate the existence or otherwise of the dependent agent PE . In the absence of proper information in this regard, we are unable to decide whether the assessee has a dependent agent PE in India. We accordingly, set aside the issue of dependent agent PE and restore to the assessing officer for fresh consideration. Ground 6 , 6.1 92. This ground is on revenue earned from supply of s .....

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ct. 94. The AO taxed the revenue earned by assessee from supply of software and provision of support services from customers based in Sri Lanka and Middle-East Asia under Sec. 9(1)(vi) and (vii) of the Act and under Article 12 of the Tax Treaty. Further, the AO also attributed 15% of the revenue earned from supply of software and hardware and 57.5% of the revenue from provision of support services from the said customers to the alleged PE in India. The DRP has confirmed the addition. 95. The lea .....

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in India. She drew our attention to the provisions of Sec.5 of the Act and Article 12 of the Tax Treaty and submitted that as per Sec.5 of the Act, the total income of a non-resident tax payer would be the income which has been received in India or has accrued or arisen or deemed to accrue or arise in India. Sec.9 of the Act which deals with Income deemed to be accrued or arise in India provides that any income by way of royalty or FTS shall be deemed to accrue or arise in the hands of a non-res .....

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s payable in respect of any right, property or information used or services utilized for the purpose of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India ………… 97. The Ld.Counsel for the assessee submitted that in the instant case, by no stretch of imagination it can be construed that the consideration paid by the end users/channel partners based in Sri Lanka and Middle East to the a .....

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ent of the other Contracting State may be taxed in that other state. 2. However, such royalties and fee for included services may also be taxed in the contracting state in which they arise and according to the law of that state……… 7. (a) Royalties and fees for included services shall be deemed to arise in a Contracting State when the payer is that State itself, a political subdivision, a local authority, or a resident of that State. Where, however, the person paying the roya .....

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lishment or fixed base is situated. 99. She submitted that in view of the provisions Article 12 of India-USA tax treaty, royalties/ FIS paid to a resident of US may be taxable in India only if the same is arising in India. Article 7(a) of the India-USA tax treaty provides that the Royalties and FIS shall be deemed to arise in India only where the payer is resident of India or has a PE or fixed place in India and such royalties/ FIS are borne by such PE or fixed place. 100. In the instant case, e .....

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ovisions of Article 7 of the India-USA tax treaty. Thus, the income from sale of software and services from Middle East and Sri Lanka has incorrectly been taxed in India. 101. The learned CIT-DR submitted that the assessee had always hidden the transaction from the tax authorities and these transactions were discovered from the employees of Aspect India during the statement recorded under Sec131 of the Act. It is unfortunate that the assessee is blaming the revenue that there is no material on p .....

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n India. 102. In her rejoinder to Revenue s allegation that the assessee had hidden the transactions from the tax authorities and the fact of the transaction came to the notice of the AO while recording the statement of Mr. Shankar Balu, the learned Counsel for assessee submitted that the since the revenue received from the customers located outside India for supply of software could not have been brought within the Indian taxation, there was no requirement on the part of the assessee to disclos .....

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rival contentions and perused the record. We find it difficult to accept the arguments of the learned CIT-DR for taxing the said receipts. In view of our observations in Ground No 2, 3 and 4, we hold that the revenues earned from customers located in Sri Lanka/ Middle East are not taxable under the Tax Treaty. Even otherwise, we are of the opinion that the said revenue is not taxable under Sec. 9 of the Act. We state our reasons below: 104. In the present case the revenue is received by the asse .....

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f both the sections shows that any income earned by a non-resident tax payer (i.e. Aspect in the present case) by way of royalty / FTS is taxable in India, if such royalty/FTS is payable by a non-resident (i.e. customers located in Sri Lanka/ Middle East) in respect of any right, property or information used or services utilized: (a) for the purposes of business, or profession carried on by such person (i.e. customers located in Sri Lanka/ Middle East) in India; or (b) for the purpose of making .....

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India. In the present case, the Revenue taxed the said income on the sole reason that these services are provided by Indian subsidiary of the asseseee and the asssessee is earning huge income from these customers. The AO has not brought anything on record to show that the customers located in Sri Lanka/ Middle East have used the rights in the IPs/ services for carrying on business in India or for the purpose of making or earning income from any source in India. Under these circumstances, we agr .....

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e of tax for computing the tax on royalty/ FTS income on gross basis. 108. The learned Counsel for the asseessee has submitted that the AO has taxed the revenue from supply of software earned and rendering of implementation, maintenance and professional services to customers located in India, Sri Lanka and Middle East as Royalty / FTS on gross basis @15% and also proceeded to attribute certain percentage of the revenue to the alleged PE thereby, resulting in double taxation of income. Accordingl .....

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at assessee s claim to be taxed at the tax rate of 10% in view of the provisions of Section 115A of the Act could have been correct, had it opted to be taxed under the provisions of the Act and not under the Tax Treaty. The assessee cannot do shopping of the royalty provisions under the Tax Treaty for the purpose of scope of royalty and then turn to the Act for the purpose of tax rate. Since the asseessee has made a choice of taxation under the provisions of Tax Treaty and it needs to stick to i .....

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110. We have heard both the parties. In view of the decision given in ground No.2, 3, 4 and 6 on taxability of revenue earned from supply of software and support services from customers located in India, Sri Lanka and Middle East, ground No.7 and 8 has become purely academic. Therefore no adjudication is required. Ground No 9 111. By way of this ground, the assessee, without prejudice to its arguments that it does not have a P.E. in India, contends the method of attribution of profits is not in .....

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d the attribution done by the AO. 113. The learned Counsel for the assessee submitted that in the instant case no profits are attributable to the alleged P.E. of the assessee on account of the following: (a) The provisions of the Act and judicial precedents, lay down the basic principle for attribution of profits of a non-resident operating through a business connection in India, that where a business connection of a nonresident is constituted under the Act, the total income of such a nonresiden .....

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carried out in India are only incidental/ ancillary to such sale, no profit/ loss can be attributed. Reliance was placed on the decisions of the Hon ble Andhra Pradesh High Court in the case of CIT vs. Navbharat Ferro Alloys Ltd (224 ITR 0261); CIT vs Hindustan Shipyard Ltd (109 ITR 0158) and CIT vs Sundwiger Empg and Co (261 ITR 110). (c) Further, the Central Board of Direct Taxes ( CBDT ) in its circular No. 23 dated July 23, 1969, with a view to clarify the position, stated that in respect o .....

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h reference to the activities performed in India. Hence, without prejudice to the contention that Aspect US does not constitute a PE in India, it is submitted that even where Aspect US is held to be taxable in India on the grounds of it having a PE as per Article 5 of the tax treaty, what can be taxed in India are only those profits that have been earned from operations carried out in India. (d) The Act does not prescribe any specific methodology for attribution of income. Rule 10 of the Income- .....

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rcentage of turnover so accruing or arising as the tax officer may consider as reasonable. • An amount which bears the same proportion to the total profits and gains of the business, as the receipts so accruing or arising bear to the total receipt of the business. • An amount calculated in the manner in which the tax officer may deem suitable. However, where the amount attributable to the Indian operations is not definitely ascertainable, the apportionment of profits under the prescrib .....

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carried outside India would need to be excluded She relied on the decision of the Hon ble Supreme Court in the case of Ahmedbhai Umarbhai & Co. (18 ITR 472, SC) and decision of Special Bench of ITAT in the case of Motorola Inc (95 ITD 269, Delhi ITAT SB). (e) Even under Article 7 of the Tax Treaty, only such profits as are directly or indirectly attributable to the PE of Appellant in India shall be taxable in India. (f) In determining the profits attributable to a PE, it is necessary to det .....

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onstitutes a PE) is remunerated on arm s length basis taking into account all the risk-taking functions of the multinational enterprise. In such a case nothing further would be left to attribute to the PE. (g) In view of the provisions of the section 7(2) of the Tax Treaty and the judicial precedents, it can be inferred that as long as the PE is being remunerated at arms length price, nothing further may be attributed to the operations/activities carried on by the PE of the foreign enterprise in .....

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ontract are negotiated and concluded by Aspect US through i-approve system, loaded on the server that is located outside India; • The onsite implementation services provided by the Aspect US through Aspect India are incidental to the contract for supply of hardware and software and thus, would partake the character of sale of hardware and software itself. • No further business profits can be attributed to the alleged PE as Aspect India has been remunerated at arm s length price by Aspe .....

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price and in consonance with provisions of the Act, the AO has no jurisdiction to question the method of computation of remuneration. (i) Aspect India is a private company registered under Companies Act, 1956 and is being assessed to income tax in Circle 3(1), New Delhi and the said transfer pricing analysis has been subject to assessment by Transfer Pricing Officer- 1(4) New Delhi ( the learned TPO ). The learned TPO for the Assessment Year 2003-04, 2004-05 and 2005-06, after due consideration .....

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e of services rendered by Aspect India in the subject assessment year under consideration is similar to the services, provided by Aspect India in the prior years, which have duly been scrutinized by the learned TPO. The AC, while making the above allegations, has not taken cognizance of the order of the learned TPO and has acted beyond his jurisdiction. In view of the above, it was submitted that Aspect US does not have any assets in India and since Aspect India has been remunerated at arms leng .....

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in India. It was submitted that the following are the various functions performed /risks associated with the hardware/software sales are affected by assessee: • Research and Development in relation to the product • Purchase/ procurement of raw material • Manufacturing using plant and machinery in USA • Sales and Marketing • Ancillary services viz, installation service • Support services viz, trouble shooting, updates, etc. • Administrative and overall managemen .....

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f installation and commissioning also happens in USA. The assessee neither assumes any risk of customers not does it holds any assets in India. 115. Alternatively and without prejudice to the above contention that no further income can be attributed to the alleged P.E., if any, of the assessee in India, it was argued that the attribution should be done having regard to the net income derived by the assessee from global operations and further restricted to the amount which can be attributed to th .....

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h the office of the Ld.AO vide submission dt. March 12, 2009 to determined profits attributed to the alleged P.E. of Aspect U.S.Inc.in India. It was submitted that as the assessee has incurred losses globally for the FY 2006-07 no profit can be attributable to the P.E. for the subject Assessment Year. 116. One more alternate argument was raised without prejudice to the main contention and it was submitted that only profit can be taxed under the Act and treaty and that the AO wrongly identified 1 .....

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P.E., the Learned Counsel relied on the following case laws. • Nokia Corporation (95 ITD 296, Delhi SB ): 20% attribution of weighted net profit. Functions identified were (a) Network planning (b) Negotiations in connection with the sale of equipment (c) The signing of the supply and installation contracts. • Ericsson Radio Systems A.B. (Supra) - The HC has also made an observation that 20% attribution appears to be higher than what is warranted under these circumstances while remandi .....

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C held the same percentage as income attributable to the signing of the contracts in India in the case of. 117. The learned CIT-DR submitted that the profits on account of sale of hardware would be taxable to the extent attributable to the PE in India. The income from licensing of software and support services is taxable as royalty/ FTS. Up to FY 2003-04, Aspect India was rendering distribution, maintenance and support services to assist implementation of global contracts. Aspect India was recei .....

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essee s argument that the role of Aspect India became limited is to be accepted then the assessee has to explain who else is performing the remaining activities for the assessee in India. In the assessment proceedings of the Indian subsidiary, the assessee was totally non -cooperative and had not submitted the required information. The assessment order notes the inconsistent position taken by the assessee regarding its role with regard to sales and services. 119. With respect to taxability of ha .....

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e assessee does not have any legal objection with regard to taxability of revenue earned from hardware sales, therefore the arguments that sales are made on FOB basis outside India can only be considered as an argument to object that attribution made at 15% of sales revenue. The assessee has not raised any ground that income from hardware sales is not taxable as per the provisions of section 5 and section 9 of the Act. Assessee has not challenged the finding of the AO that it has business connec .....

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the products passing to the Customer upon shipment which is FOB Aspect s shipping location (Clause 5(c) on page 86 of the PB, in that case income may not accrue or arise in India but income will still deem to accrue or arise in India on account of operations in relation to sales being carried out in India and business connection of the assessee and income in relation to such operations is taxable in India as per provisions of Section 5(2)(b) of the Act. In this regard, reliance was placed on the .....

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ment that in absence of a PE no profits on account of sale of hardware can be attributed to the alleged PE, it was submitted that the assessee has PE in India and the PE was involved in all the pre-sales activities including price negotiation of equipments. Therefore, the AO has rightly attributed profits as per provisions of Article 7 of the Tax Treaty. Prior to the new arrangement of cost plus, a commission of 11% of the sale price was being paid to Aspect India for the services provided by th .....

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le of hardware can be attributed as taxable in India. However, without prejudice it is submitted that if PE is upheld, the hardware income be taxed on net basis by following 15% attribution to the profits of the Aspect US in India (i.e. Revenue x Attribution rate x Profit rate). 123. We have heard the rival contentions and perused the material on record. We see merit in the arguments of the learned counsel of the assessee. In the instant case, the AO has not provided the basis for attributing th .....

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s been determined for the Indian associate enterprise, which subsumes the functions, assets and risk profile of the allege PE. The above view was expressed by the bench considering the CBDT circular No.5 of 2004 dt.28-9-2004 as well as the ratio upheld by the Supreme Court in Morgan Stanley (Supra), the Bombay High Court in Set Satellite Singapore (P) Ltd. Vs. DIT, International Taxation (307 ITR 205), the jurisdictional High Court in Rolls Royce Singapore (P) Ltd., Vs. Asst. DIT (202 Taxman 45) .....

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ngth payment to a subsidiary PE as per FAR analysis would be sufficient for such attribution. 126. In view of the above, we agree with the learned counsel of the assessee that where an associated enterprise (that also constitutes a PE) is remunerated on arm s length basis taking into account all the risk taking functions of the multinational enterprise, nothing further would be left to attribute to PE. 127. For A.Y.2003-04, 2004-05 and 2005-06, the transfer pricing analysis of Aspect India was r .....

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P determined by the TPO for computing the total income of the assessee. Thus, the order of the TPO is binding on the AO to the extent it is not prejudicial to the assessee. Accordingly, for AYs 2003-04 and 2004-05, we hold that no further income can be attributed to the PE in India. 128. For the other A.Ys under appeal, we direct the AO to refer the matter to the TPO wherever there is no existing reference either in the case of Aspect US or Aspect India. The TPO shall determine ALP and attribute .....

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see relied on Article 7 of the Tax Treaty and submitted that while determining the profits of the P.E. there shall be allowed as deduction, expenses which are incurred for the purpose of business of the PE including reasonable allocation of executive and general administrative expenses, research and development expenses, interest and other expenses incurred for the purpose of the enterprise as a whole whether incurred in India or elsewhere. Therefore, the AO ought to have allowed the remuneratio .....

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same will result in double taxation. It was pointed out that in the draft assessment order the AO has allowed the deduction and the DRP has also held that the AO rightly deducted the compensation paid by the assessee to ACC but however while passing the final assessment order the AO did not give the deduction for the said expenditure 131. The Learned CIT-DR submitted that the DRP in paragraph 6 of the order had held that the amount paid by the assessee to Aspect India qualifies as a deductible e .....

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shall be allowed as deduction and such deduction may be in line with the income that is attributed to the PE. 132. He further submitted in case of services the provisions of Article 12(6) will trigger and the provisions of Article 7 would apply since the support services are rendered through its PE. In that case, the revenue from services is attributable to the PE and expenses incurred by Aspect India in providing such services will qualify for deduction. However, the same would not apply to li .....

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ide on attribution of profits, we are of the view that this issue should also go back to the AO for fresh adjudication in accordance with law. Ground 11, 11.1 134. The ground is on applicability of transfer pricing provisions and rejection of Transfer pricing analysis of Aspect India. 135. The AO held that the transfer pricing provisions are applicable to the assessee. Further, he rejected the Transfer Pricing analysis of Aspect India and thereby attributed further consideration to Aspect India. .....

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dia. She also disputed the rejection of transfer pricing analysis of Aspect India and she defended the TP study of the Subsidiary company and argued that no penalty can be levied u/s 271BA and 271 AA is not maintaining transfer pricing documentation. 137. The Learned CIT-DR submitted that there is no dispute that the assessee and ACT are associated enterprises. Further, the transactions in regard to rendering of services by ACT are international transactions. Therefore, the AO has rightly held t .....

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o the international transaction between assessee and Aspect India. The information on functions performed has been obtained by the AO based on enquiries and statements employees of Aspect India recorded during the course of assessment proceedings. Most glaring omission in the TP analysis was with regard to functions performed by employees of Aspect India in regard to marketing and sales including deciding of prices of products of the assessee that are sold in India, Sri Lanka and the Middle East .....

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d that the allegation of the Revenue that the Transfer Pricing analysis of Aspect India is defective since the FAR analysis has not been captured properly is not correct. It was submitted that the while comparing the functions, the AO has listed down certain clauses which are in no manner be held to be functions performed by ACC. The clauses quoted by the AO in the order do not in any way expand the scope of functions performed by ACC. Therefore, the functions identified in transfer pricing stud .....

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ied on the decision of the Hon ble Supreme Court in the case of Morgan Stanley and Co. Inc (Supra). 140. Similar issues have been dealt with by us earlier in this order while dealing with attribution of profits to the PE. As the criteria for adjudication of both the issues is similar, consistent with the view taken by us we direct the assessing officer to accept the TPO analysis of Aspect India wherever the same is available. Ground no.11.2, 11.3, 12 141. By way of this ground, the assessee has .....

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terest u/s 234B of the Act placing reliance on the judgement of the Jurisdictional High Court in the case of DIT vs. Jacabs Civil Incorporated (330 ITR 578, Del HC) and other case laws on the subject. She also distinguished the decision of Hon ble Delhi High Court in the case of Alcatel Lucent USA Inc (330 ITR 578, Del HC). 143. The Learned CIT-DR opposed the contentions of the assessee and submitted that the assessee has not cooperated with the revenue authorities during the proceedings in asse .....

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t deduction, it needs to be examined whether the assessee had any role in such short/ non deduction of tax. 144. He further submitted that it is not in dispute that the assesee has not offered the income from software licensing, sale of equipments and service fee to tax. It is disputing the taxability of these sources of income and continues to dispute even before the Hon ble Tribunal. The facts of the present case are covered by the decision of the Hon ble Delhi High Court in the case of Alcate .....

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n deducting tax at source, the department can take action against the payer under the provisions of section 201. In such a case, the non- resident cannot be held liable to pay interest under section 234B on account of default of the payer in deducting tax at source from the payments made to the non-resident. 146. However in a subsequent decision in the Alactel Lucent, the Hon ble Delhi High Court on a specific fact situation held that where non-resident assessee accepted its liability to be taxe .....

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is that tax on the entire income received by the assessee was required to be deducted at appropriate rates by the respective payers under section 195(2). Had the payer made the deduction of tax at the appropriate rate, the net tax payable by the assessee would have been Nil. 149. In the case of Alcatel, Alcatel has not offered the income to tax while filing the tax return and also the deductees had not withheld tax on the same. However, in the present case, tax was deducted at source by the cust .....

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